What is clear is that the recent market rally is once again being driven by the Federal Reserve's QE programs. Money is flowing out of bonds, and the dollar, and into equities. The weekly chart below shows the decline in the market this past September and October as excess reserve balances with the Fed were drawn down. The subsequent rally has been fueled by the Fed as it has pumped reserve balances sharply higher.
But here's the thing. The rally started a month too early for the Fed's QE efforts to be responsible for it. Here, the Fed's latest QE efforts (let's call it QE 4.0) really only began properly on 12 December 2012. The rally, on the other hand, began after stock prices bottomed on 15 November 2012 - a month before the Fed announced it would expand its balance sheet and long after the previous generation QE 3.0 was initiated in August 2012.
So the Fed's quantitative easing isn't behind the stock market rally. Instead, we can demonstrate that investor expectations for future dividends is behind it.
Following the 6 November 2012 national elections in the U.S., influential investors began racing the clock to beat the expiration of low tax rates for dividends after the end of the year, which were now guaranteed thanks to the outcome of the elections.
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